Senators Expand Leasing Tax Shelters Probe to Energy Department

WASHINGTON -- Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen.Max Baucus, ranking member, have expanded yet again their inquiry into federal agencies that mayhave played a role in approving abusive tax shelter leases using infrastructure assets. Today, thesenators wrote to the Energy Department asking for details of any such deals those agencies haveapproved. A review of recent documents indicates taxpayer-funded power plants may have beenleased for corporate deductions.

Today’s letter follows similar letters last week to the Federal Aviation Administration andthe Environmental Protection Agency and an earlier letter to the federal Transportation Department,the results of which the senators released last week. The senators also have shared their findingsso far with the leaders of the Senate budget and appropriations committees and the HouseAppropriations Subcommittee On Transportation, Treasury, and Independent Agencies. They haveexpressed concern that at least $2 of federal tax revenues is lost for every $1 of benefit that isreceived by a municipality or government agency in the form of a shelter promoter accommodationpayment. States also lose significant revenue from these arrangements.

Grassley and Baucus have included their leasing loophole closer in the foreign salescorporation/extraterritorial income bill -- the Jumpstart Our Business Strength (JOBS) Act --pending before the full Senate. Grassley hopes for Senate completion of the bill, and approval ofthe leasing loophole closer, by the month’s end.

We are writing to enlist the assistance of the Department of Energy in our ongoinginvestigation of abusive tax shelters. On October 21, 2003, the Committee on Finance held ahearing regarding the continuing proliferation of abusive tax shelters. During that hearing, welearned that shelter promoters are engaging in transactions with U.S. municipalities and other stateand local governmental units, which allow major U.S. corporations to depreciate state and localinfrastructure assets, such as railways, subways, dams, water lines, power plants, and electricaltransmission systems. Our subsequent investigations have disclosed that federal agencies haveendorsed these transactions, even though the Department of the Treasury had classified them asabusive tax shelters.

Under this scheme, municipalities are paid an up-front cash fee to enter into a long-termlease of their infrastructure to the tax shelter promoters. The cash received by the municipality,however, pales in comparison to the federal tax benefits received by the corporations, which willbe able to depreciate taxpayer-funded bridges, subways, and rail systems as a result of the lease.

As part of the same agreement, the promoters will agree to simultaneously lease the assets back tothe municipality. The obligations of the promoters and municipalities are prepaid through“phantom” debt, and neither the tax promoters nor the municipality assumes any credit or ownershiprisk. At the end of the lease term, the infrastructure assets revert back to the municipality througha pre-funded repurchase arrangement. In reality, nothing changes regarding the ownership or useof the infrastructure. One municipal manager described these transactions as “people giving himmoney which he never had to pay back, for doing something that he was already doing.”

In March 1999, the Department of the Treasury under the Clinton Administration initiatedenforcement actions against these transactions, which are called LILOs - an abbreviation of theirindustry name "lease-in-lease-out" transactions. We have further learned that these transactionshave continued, albeit in a different form, and that other federal agencies may be approving thesetransactions. The LILO transactions have now been replicated through service agreement contractsand transactions called SILOs -- “sales-in-lease-out.” Other variations on these transactions haveinvolved qualified technology equipment (QTEs). We have been advised that state and localinfrastructure projects which receive federal funding must obtain the review and approval of theDepartment of Energy in order to enter into these transactions.

We are certain that you share our concern that water lines, waste treatment plants, powerplants, and electrical transmission systems constructed with taxpayer dollars are being used by bigcorporations to shelter billions of dollars in taxes through bogus depreciation deductions. In orderto assist us in assessing the scope and scale of this problem, we request that the Department ofEnergy submit to the Committee on Finance copies of all documents relating to LILOs, SILOs,QTEs, and similar transactions that have been approved, funded, or otherwise reviewed by theDepartment of Energy from the year 1995 to present.

We appreciate your cooperation in our ongoing efforts to combat abusive tax shelters, andlook forward to receiving these materials as soon as possible.